I am vice chairman of Mesirow Financial and head of its Investment Banking group. I have more than 30 years of experience in investment banking. Prior to joining Mesirow Financial, I was a founding partner of GGW Management Partners, LLC, a management-oriented investment group formed with Madison Dearborn Partners, Willis Stein & Partners and The Pritzker Organization. Before forming GGW Management Partners, I was a managing director at Lazard Frères & Co., LLC. I also served as vice president in Salomon Brothers' Chicago Banking Group, focusing on mergers, acquisitions and corporate finance. I am a Certified Public Accountant and holds FINRA Series 7, 8, 24, 64 and 79 licenses, and earned B.S. in accounting from the University of Illinois in Champaign-Urbana, and a J.D. from the Northwestern University School of Law.

The New Lenders In Town

Picture this scenario: you walk into the bank to get a loan for your business from which you have received financing for decades and walk out of the bank without a loan. If this is you, you are not alone. The financing markets have changed drastically since the recession, and as a result, traditional lending is now tougher to obtain. No need to fret though: non-traditional lenders have joined the financing party in full force.

Since the recession and the implementation of Dodd-Frank, we have seen banks fortify their balance sheets and reduce leverage levels. As a result, banks are less inclined to extend financing to higher leverage credits, which are often necessary to consummate a transaction. This may be viewed as unsettling to some, but fortunately, there are a host of non-traditional lenders that are taking an increasingly active role in lending. In 2013, lenders other than traditional banks made more than a quarter of the loans to companies with less than $500 million of revenue, a 19 percent increase from 2012.1

Business Development Companies (BDCs) are at the forefront of the uptick in non-traditional lending, having raised nearly $35 billion of equity.2 BDCs are closed-end investment vehicles in which investors buy a portion of the fund rather than the management company’s share like in traditional private equity funds. To maintain tax-free status, BDCs pay out 90 plus percent of income in dividends yielding 9 percent on average.2 In a low interest rate environment, BDCs have attracted investors seeking steady, higher yielding assets.1

So, what does the emergence of BDCs mean for M&A? Many experts, including myself, believe BDCs will help fuel M&A activity. BDCs offer an alternative source of financing, and more transactions can be completed when there are more financing options. As traditional lenders face regulatory hurdles, BDCs and other non-traditional lenders bring necessary supply to the marketplace.

Non-traditional lenders have brought an added element of competition to the financing markets as well, and we are starting see higher leverage multiples as a result of the increased competition. For the first three quarters of 2013, the average debt multiple on middle market LBO loans was 5.3 times EBITDA, the highest since the recession.3 These improved leverage multiples have created a renewed sense of optimism in the M&A markets, and we expect to see increased activity, as a result, in the first half of 2014.

Despite the buzz related to non-traditional lenders such as BDCs, traditional lenders still play an important role in the financing markets and will continue to do so in the future. Even though more options exist, traditional lending still occupies the greatest share of the lending market. As banks become better acclimated with post-recession legislation, they will reestablish their position in the financing markets. Still, it may take a long time (if ever) for banks to return to pre-recession leverage levels, as such, non-traditional lenders have filled a rather crucial void.

Is the evolving financing market good for M&A? I believe it is, as businesses are no longer limited to bank financing. We look forward to seeing a robust M&A market in 2014 and expect leverage multiples on transactions to remain high.

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